FCA publishes second line of defence rules

Consumers must be given personalised retirement risk warnings if they want to access their pension savings, but the FCA will not treat these communications as regulated advice, the regulator has confirmed today.

Providers and platforms must ask the consumer questions to identify whether risk factors are present, and give appropriate retirement risk warnings in response to these questions.

Firms will have to identify the main risk factors relevant to the pension decumulation products they offer to consumers and prepare questions that will help them identify the presence of those risk factors in relation to each of the pension decumulation products offered, the FCA says. Risk factors for the purchase of a single life annuity would include whether a consumer has a partner or dependents, with the warning explaining that they will not be provided for on death.

The rules, contained in Policy Statement PS15/04, Retirement reforms and the guidance guarantee: retirement risk warnings, will apply to providers holding the consumer’s pension assets, including Sipp operators and execution-only firms, and providers contacted by a consumer looking to buy a decumulation product with a provider.

Uncrystallised fund pension lump sum risk factors include tax implications, sustainability of income in retirement, charges, debt, impact on means-tested benefits and investment scams. Drawdown risk factors include all of these plus a question asking whether the consumer has shopped around.

Retirement risk warnings can be given in whatever way the consumer is in contact with the provider, whether in person, on the telephone, through the internet or in writing.

The risk warnings must be given even where consumers have been through Pension Wise guidance, although they will not be necessary where an individual has received full advice.

Firms must ask the consumer relevant questions, based on how the consumer wants to access their pension savings, to determine whether risk factors are present. If they are, risk warnings must be given.

Risk warnings will relate to how the consumer has decided to access their pension savings and require the firms to ask the consumer questions to identify if a risk factor is present and therefore if a risk warning must be given.

The FCA says the new rules do not require firms to replicate the Pension Wise service. Instead, and in addition to Pension Wise, the rules ensure firms will flag specific risks to consumers, and give them appropriate warnings about the choices they have in accessing their pension savings. These warnings may include setting out options the consumer has, such as shopping around.

The FCA says these retirement risk warnings can be given without providing regulated advice; we are not requiring firms to tell consumers what to do or implying that the consumer’s decision will be wrong. We are simply requiring firms to ensure the consumer is aware of the risks of the course of action they are seeking to take.

The rules have been published without consultation on the grounds that the delay involved in consulting would be detrimental to consumers’ interests. The regulator is planning a consultation on updating rules in the pension and retirement area in summer 2015 following a thorough review. The FCA will consult at this time on whether to retain, modify or add to the rules outlined in this Policy Statement.

The Pension Regulator will be publishing complementary guidance for trustees following the laying of amendments to the Disclosure regulations before Parliament. The guidance will provide clarity for trustees on the new requirements to signpost pensions guidance. In addition, it will set out the Regulator’s expectations of trustees in relation to the provision of information to their members on the generic risks of the decumulation options.